2791632 Basic Information on Mutul Funds

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CHAPTER ONE:

1) INTRODUCTION:

1.1.1 MUTUAL FUND:

The SEBI regulations, 1993 defines a mutual fund as a fund in the form of a

trust by a sponsor, to raise money by the trustees trough the sale of units to the public,

under one or more schemes, for investing in securities in accordance with these

regulations

A mutual fund is a professionally-managed firm of collective investments thatpools money from many investors and invests it in stocks, bonds, short-term money

market instruments, and/or othersecurities. In a mutual fund, the fund manager, who is

also known as the portfolio manager, trades the fund's underlying securities, realizing

capital gains or losses, and collects the dividend or interest income. The investment

proceeds are then passed along to the individual investors. The value of a share of the

mutual fund, known as the net asset value per share (NAV), is calculated daily based on

the total value of the fund divided by the number of shares currently issued and

outstanding.

1.1.2 HISTORY OF THE MUTUAL FUND:

In the beginning:

Historians are uncertain of the origins of investment funds; some cite the closed-end

investment companies launched in the Netherlands in 1822 by King William I as the first

mutual funds, while others point to a Dutch merchant named Adriaan van Ketwich whose

investment trust created in 1774 may have given the king the idea. Van Ketwich probably

theorized that diversification would increase the appeal of investments to smaller

investors with minimal capital. The name of van Ketwich's fund, EENDRAGT MAAKT

MAGT, translates to "unity creates strength". The next wave of near-mutual funds

included an investment trust launched in Switzerland in 1849, followed by similar

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vehicles which is followed by many kind of companies created in Scotland in the 1880s.

The idea of pooling resources and spreading risk using closed-end investments soon took

root in Great Britain and France, making its way to the United States in the 1890s. The

Boston Personal Property Trust, formed in 1893, was the first closed-end fund in the U.S.

The creation of the Alexander Fund in Philadelphia, Pennsylvania, in 1907 was an

important step in the evolution toward what we know as the modern mutual fund. The

Alexander Fund featured semi-annual issues and allowed investors to make withdrawals

on demand.

The Arrival of the Modern Fund :

The creation of the Massachusetts Investors' Trust in Boston, Massachusetts, heralded

the arrival of the modern mutual fund in 1924. The fund went public in 1928, eventually

spawning the mutual fund firm known today as MFS Investment Management. State

Street Investors' Trust was the custodian of the Massachusetts Investors' Trust. Later,

State Street Investors started its own fund in 1924 with Richard Paine, Richard Saltonstall

and Paul Cabot at the helm. Saltonstall was also affiliated with Scudder, Stevens and

Clark, an outfit that would launch the first no-load fund in 1928. A momentous year in

the history of the mutual fund, 1928 also saw the launch of the Wellington Fund, which

was the first mutual fund to include stocks and bonds, as opposed to direct merchant bank

style of investments in business and trade.

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Regulation and Expansion:

By 1929, there were 19 open-end mutual funds competing with nearly 700 closed-

end funds. With the stock market crash of 1929, the dynamic began to change as highly-

leveraged closed-end funds were wiped out and small open-end funds managed to

survive.

Government regulators also began to take notice of the fledgling mutual fund industry.

The creation of the Securities and Exchange Commission (SEC), the passage of

the Securities Act of 1933 and the enactment of the Securities Exchange Act of 1934put

in place safeguards to protect investors: mutual funds were required to register with the

SEC and to provide disclosure in the form of a prospectus. The Investment Company Act

of 1940 put in place additional regulations that required more disclosures and sought to

minimize and minimize grievience of investor of different catogeries conflicts of interest.

The mutual fund industry continued to expand. At the beginning of the 1950s, the numberof open-end funds topped 100. In 1954, the financial markets overcame their 1929 peak,

and the mutual fund industry began to grow in earnest, adding some 50 new funds over

the course of the decade. The 1960s saw the rise of aggressive growth funds, with more

than 100 new funds established and billions of dollars in new asset inflows.

Hundreds of new funds were launched throughout the 1960s until the bear market of

1969 cooled the public appetite for mutual funds. Money flowed out of mutual funds as

quickly as investors could redeem their shares, but the industry's growth later resumed.

Massachusetts Investors Trust (now MFS Investment Management) was founded on

March 21, 1924, and, after one year, had 200 shareholders and $392,000 in assets. The

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entire industry, which included a few closed-end funds, represented less than $10 million

in 1924.

The stock market crash of 1929 slowed the growth of mutual funds. In response to the

stock market crash, Congress passed the Securities Act of 1933 and the Securities

Exchange Act of 1934. These laws require that a fund be registered with the (SEC) .

1.1.3 SETUP OF MUTUAL FUNDS:

A mutual fund is set up in the form of a trust, which has sponsor, trustees, Asset

Management Company (AMC) and custodian. The trust is established by a sponsor or

more than one sponsor who is like promoter of a company. The trustees of the mutual

fund hold its property for the benefit of the unit holders.

Asset management company (AMC) approved by SEBI managers the fund by

making investments in various schemes of the in its custody. The trustees are vested with

the general power of superintendence and direction over AMC. They monitor the

performance and compliance of SEBI regulations by the mutual fund.

SEBI regulations require that at least two thirds of the directors of trustee

company or board of trustees must be independent i.e., they should not be associated with

the sponsors. Also, 50% of the directors of AMC must be independent. All mutual funds

are required to be registered with SEBI before they launch any scheme. The performance

of a particular scheme of a mutual fund is denoted by net value (NAV).

1.1.4 MUTUAL FUND VS OTHER INVESTMENT:

Mutual funds offer several advantages over investing in individual stocks. For example,

the transaction costs are divided among all the mutual fund shareholders, who also

benefit by having a third party (professional fund managers) apply expertise and dedicate

time to manage and research investment options. However, despite the professional

management, mutual funds are not immune to risks. They share the same risks associated

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with the investments made. If the fund invests primarily in stocks, it is usually subject to

the same ups and downs and risks as the stock market.

1.1.5 SHARE CLASES:

Many mutual funds offer more than one class of shares. For example, you may have seen

a fund that offers "Class A" and "Class B" shares. Each class will invest in the same pool

(or investment portfolio) of securities and will have the same investment objectives and

policies. But each class will have different shareholder services and/or distribution

arrangements with different fees and expenses

1.1.6 DISTRIBUTION CHANNELS IN THE MUTUAL FUND INDUSTRY:

In India, AMCs work with five distinct distribution channels those are direct , banking,

retail, corporate and indiual financial adviser.

The Direct Channels:

In the direct channel, customers invest in the schemes directly through AMC. In

most cases , the company does not provide any investment advice, so these

investors have to carry out their own research and select schemes themselves. The

fund companies provide several tools to investors who invest through this

channel. This includes monthly a/c statement, processing of transaction, and

maintaince of records. In this channel most investors can invest through websites,

or receive information through telephonic services provided by the company.

About 10-20% of the total sales of an AMC come through this direct channel.

The banking channel:

The large customer base of banks, in devolped countries, have played an

important role in the selling MFs. In the recent years, this cahannel has also

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opened up in india. Banks operating in india , including public sector, private and

foreign banks have established tie-up with various fund companies for providind

distribution and servicing.

The banking channel is likely to develop as the most vital distribution channel for

fund companies there are several reaons for the same. Customers remain invested

in banks for long periods of time and therefore banks maintain a relationship of

trust with their customers. Customers are rely on advice provided to them by

bankers as they are always on the look out for better investment avenues.

Managers are guiding to customers about various funds.

An additional advantage that banks provide is that the concerned customer

becomes a permanent contact of the banks and therefore can be reached during

launch of (new fund offer) NFO or new schemes any time in the future.

The retail channel:

A customer can deal with directly with a sub broker belonging to a distribution

company, instead of taking trouble of dealing with several agents. Distribution

companies sell the schemes of several fund houses simultaneously and brokerage

is paid by the AMC whose funds they sell. The retail channel offer the benefits of

specialist knowledge and established client contact and, therefore private fund

houses are generally prefer this channel. Some of the major players in India in this

in this channel are national players lke Karvey, Birla sunlife IL&FS and

cholamandalam. The key factor for this channel to sell a companys fund used to

be the brokerage paid. The banking and retail channel generally contribute to

about 50-70% of the total Asset Under Management(AUM).

The corporate channel:

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The corporate channel includes a variety of institutions that invest in shares on the

companys name. these are businesses, trust, and even state and local

governments. For institutional investors, fund managers prefer to create special

funds and share classes. Corporate can either invest directly in mutual funds, or

through an intermediary such as a distribution house or a bank.

Corporate exhibit varying degrees of awareness of mutual fund products. Most of

the established corporate, such as the TVS industries in Hyderabad, are well-

versed with the performance and composition of various funds. The smaller

companies and start-up firms, however, need to be educating on several aspects of

mutual funds. In order to provide information to such clients, fund companies

usually organize presentation for these companies or set-up meetings with the

finance managers.

Individual Financial Advisors(IFA) or Agents:

i. The IFA channel is the oldest channel for distribution and was widely employed

at the time when UTI monopoly in the market. In recent times with the

emergence significantly decreased.

ii. An agent who basically acts as an interface between the customer and the fund

house there is a unique systems in place in India , wherein several sub-brokers are

working under one main broker. The huge network of sub-brokers, thus ensure

larger market penetration and geographic coverage. As per AMFI, over one lakh

agents are registered to sell mutual funds and other financial products such as

insurance across the country.

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1.1.7 SEBI REGULATION ON THE INVESTMENT OF A MUTUAL FUND:

The investments of a mutual fund are subjected to a set of regulations prescribed by

SEBI. Presently following restrictions apply.

No term loan shall be granted by a mutual fund scheme.

A mutual fund, under all its schemes taken together, will not own more than 10

% of any companys paid up capital carrying voting rights.

A scheme may invest in another scheme under the same asset managementcompany or any other mutual fund withought charging any fees, provided

A scheme may invest in another sheme under the same asset management

company or any other mutual fund without charging any fees, provided that the

aggregate inter scheme investment made by all the schemes under the same

management.

Transfers of investment from one scheme to another scheme of mutual fund

permitted provided that:

a. Such transfers are done at the prevailing market price for quoted

instruments on spot basis.

b. The securities so transferred shall be in conformity with the investment

objectives of the schemes to which such transfer has been made.

c. The registration and accounting of the transactions is completed and

ratified in the next meeting of the board of trustees.

A mutual fund may borrow to meet liquidity needs, for the purpose of repurchase,redemption of units, or repayment of interest or dividend to the unitholders. Such

borrowings shall not exceed 20% of the net asset of the scheme and the duration

of the borrowing shall not exceed 6 months. The fund may borrow from

permissible entities at prevailing market rates and may offer the assets of the

schemes as collateral for such borrowings.

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A scheme shaal not invest more than 15% of its NAV in debt instruments issued

by a single issuer which are rated not below investment grade by an authorized

credit rating agencu. Such investment limit may be extended to 20% of the NAV

of the scheme with the prior approval of Board of Trusttes and the Board of Asset

Management Company. This limit, however, is not applicable for investment in

governments securities and money market instruments.

A scheme shaal not invest more than 10% of its NAV in unrated debt instruments

issued by a single issuer and the total investment in such instruments shall not

exceed 25% of the NAV of the scheme.

A mutual fund will buy and sell securities on the basis of deliveries. It cannot

make short sales or engage in carry forward transactions.

A scheme shall not make any investment in

a. Any unlisted security of an associates or group company of the sponsor .

b. Any security issued by way of private placement by an associate or group

company of the sponsor

c. The listed securities of group companies of the sponsor in exess of 25% of the

net assets.

The investment manager may invest in a scheme from time to time. The percentage of

such investments to the total net assets may vary from time to time and can be upto

100% of the net assets of the schemes.

A scheme shall not invest more than 10% of its NAV in the equity shares or equity

related instruments of any one company.

A scheme may invest in ADRs/GDRs of Indian companies listed on overseas stock

exchanges to the extent and in a manner approved by RBI .

A scheme shall not invest more than 5% of its NAV in unlisted euity shares or equity

related instruments in case of an open ended schemes and 10% of its NAV in case a of

closed ended scheme.

1.1.8 TAX SAVING ON MUTUAL FUND:

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A. There are two types of tax-saving funds, equity-linked savings schemes (ELSS) and

pension funds. ELSS schemes are basically diversified equity schemes, which have a

three-year lock-in. Investments heresubject to a maximum of Rs 10,000receive a

tax rebate of 0 to 20 per cent depending on the income slab. As these are equity

instruments they have the maximum risk-return potential among all asset classes. What

this means is that return has a propensity to vary with great intensity. Although an

average tax-saving mutual fund delivered 16.36 per cent in 2002, the range of returns was

extreme. Thus, in that year, the best tax-saving fund delivered 42.61 per cent and the

worst was down 3.16 per cent. The best way to overcome the vagaries of stock markets is

to diversify. Diversification can be across funds and, more importantly, across timeperiods. By investing regularly every year in these funds one can set up a long-term

systematic investment plan.

The other route for saving taxes is pension funds, even though there are currently only

two such funds in operation, Franklin Templeton's Templeton India Pension Fund and

UTI's Retirement Benefit Plan. Introduced for the first time in 1997, pension funds are

hybrid schemes, which have a debt orientation, and carry the same tax benefit as ELSS.

From the taxpoint of view, bonus units are conceptually similar to dividend stripping,

but somewhat more complex. Bonus units that a fund issue is deemed to have been

acquired at zero cost. Thus, whenever they are sold, the entire sale price is treated as

capital gains. However, at the time of issue of bonus, the NAV of the fund drops in a

proportion that is identical to the ratio at which bonus funds are issued. This fall in the

NAV is a capital loss as far as the original units are concerned and it is here that tax

benefits can be realised. The original units can be sold off with a capital loss, which can

be used to set off other capital gains. The bonus units carry a high tax liability though

since you will pay taxes on the entire sale price.

Here's an example. Suppose you hold 10,000 units of a fund whose NAV is Rs 15. You

made the purchase less than a year ago at an NAV of Rs 12. If today you decide to sell

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these units, you will fetch Rs 1.5 lakh, out of which Rs 30,000 will be short-term capital

gain. On this, you are likely to pay a tax of Rs 9,00030 per cent of gains.

1.1.9 ROLE OF MUTUAL FUND IN STOCK EXCHANGE:

Mutual funds are an ideal vehicle for investment by retail investors in the stock market

for several reasons.

i. It pools investments of small investors together increasingly thereby the participation

in the stock market.

ii. Mutual funds being institutional investors, can invest in market analysis generally not

available or accessible to individual investors, providing therefore informed decisions

to small investors.

iii. Mutual fund can diversify the portfolio in better way as compared with individual

investors due to the expertise and availability of funds.

Mutual funds in india, because of their mall size and slower growth in the recent past,

have tended to play only a limited role in the stock market.the share of mutual funds in

total turnover of the stock market (BSE+NSE), which was 4.9% in January 2000,

declined to 3.6% by January 2003.

1.1.10 Mutual Funds FAQs:

(NAV)

Net Asset Value is the market value of the assets of the scheme minus its liabilities. The

per unit NAV is the net asset value of the scheme divided by the number of units

outstanding on the Valuation Date.

Sale Price

Is the price you pay when you invest in a scheme. Also called Offer Price. It may include

a sales load.

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Repurchase Price

Is the price at which a close-ended scheme repurchases its units and it may include a

back-end load. This is also called Bid Price.

Redemption Price

Is the price at which open-ended schemes repurchase their units and close-ended schemes

redeem their units on maturity. Such prices are NAV related.

Sales Load

Is a charge collected by a scheme when it sells the units. Also called, Front-end load.

Schemes that do not charge a load are called No Load schemes.

Repurchase or Back-end Load

Is a charge collected by a scheme when it buys back the units from the unit holders.

1.1.11 COST INVOLVED IN MUTUAL FUNDS:

An investor must know that there are certain costs involved while investing in mutual

funds.

OPERATING EXPENSES:

These refer to cost incurred to operate a mutual fund. Advisory fee is paid to investment

managers, audit fees to charted accountant, custodial fees, register and transfer agent fees,

trustee fees, agent commission. Operating expenses also known as expenses ratio which

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is annual expenses expressed as a percentage of these expenses is required to be reported

in the schemes offer document or prospectus.

Expenses ratio=

For instant, if funds Rs. 100 crores and expenses Rs. 20 lakhs. Then expenses ratio is 2%

expenses ratio is available in the offer document and fro historical per unit statistics

included in the financial results of the fund which are published by annually, un audited

for the half year ending September 30th and audited for the physically year end 1st March

30th .

Depending upon scheme and net asset, operating expenses are determined by limits

mandated by SEBI mutual funds regulation act. Any excess over specified limits as to

born by Management Company, the trustees or sponsors.

SALES CHARGES:

These are known commonly sale loads, these are charged directly to investor. Sales loads

are used by mutual fund for the payment of agents commission, distribution and

marketing expenses. These charges have no effect on the performance of the scheme.

Sales loads are usually expression percentage and or of two types front-end and back-end.

FRONT-END LOAD:

It is a one time fixed fee paid by an investor when buying a Mutual funds scheme. It

determines public offer price which intern decides how much of your initial investment

actually get invested the standard practice of arriving a public offer price is as follows.

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Average net assets


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Public offer price=

Let us assume, an investor invests Rs. 10,000 in a scheme that charges it 2% front end

load at a NAV per unit Rs. 10 using the formula public offer price = 10/(1-0.02) is Rs.

10,20. So only 980 units are allowed to the investor.

Number of units allotted=

10,000/10,20= 980 units at a NAV of Rs. 10.

This means units worth 9800 are allotted to him an initial investment Rs.10,000 front end

loads tend to decrease as initial investment amount increase.

BACK END LOAD:

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Net asset value

(1-front end load)

Amount invested

Public offer price


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May be fixed fee redemption or a contingent differed sales charged a redemption so load

continues so long as the redeeming or selling of the units of a fund does not take place in

the event of a back end load is applied. The redemption price is arrive or using following

formula.

Redemption price =

Let us assume an investor redeems units valued at Rs. 10,000 in a scheme that charges a

2% back, end load at a NAV per units of Rs. 10 using the formula Redemption price 10/

(1+0.02)= Rs. 9.8 s, what the investor gets in hand is 9800(9.8*1000).

CONTINGENT DEFERRED SALES CHARGES (CDSC):

Contingent differed sales charges of a structured back end load. It is paid when the units

are reading during the initial years of ownership. It is for a predetermined period only

and reduced over the time you invested for a fund. The longer remains in a fund the

lower the CDSC.

The SEBI stipulate the a CDSC may be charge only for first four years after purchase of

units and also stipulate the maximum CDSC that can we charge every year. This is the

SEBI mutual funds regulations 1996 do not allow either the front end load or back end

load to any combination is higher than 7%.

TRANSACTION COST:

Some funds may also impose a switch over fee which is charge on transfer of investment

from one scheme to another within a same mutual funds family and also to switch from

one plan to another within same scheme.The real estate mutual funds sector is now being

considered as the engine of economic growth.

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(1+back end load)


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1.1.12 The objectives of Association of Mutual Funds in India:

The Association of Mutual Funds of India works with 30 registered AMCs of the

country. It has certain defined objectives which juxtaposes the guidelines of its Board of

Directors. The objectives are as follows:

This mutual fund association of India maintains a high professional and ethical

standards in all areas of operation of the industry.

It also recommends and promotes the top class business practices and code of

conduct which is followed by members and related people engaged in the

activities of mutual fund and asset management. The agencies who are by any

means connected or involved in the field of capital markets and financial services

also involved in this code of conduct of the association.

AMFI interacts with SEBI and works according to SEBIs guidelines in the mutual

fund industry.

Association of Mutual Fund of India do represent the Government of India, the

Reserve Bank of India and other related bodies on matters relating to the Mutual

Fund Industry.

It develops a team of well qualified and trained Agent distributors. It implements

a programme of training and certification for all intermediaries and other engaged

in the mutual fund industry.

AMFI undertakes all India awarness programme for investors inorder to promote

proper understanding of the concept and working of mutual funds.

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At last but not the least association of mutual fund of India also disseminate

informations on Mutual Fund Industry and undertakes studies and research either

directly or in association with other bodies.

1.1.13 The sponsorers of Association of Mutual Funds in India:

Bank Sponsored :

SBI Fund Management Ltd.

BOB Asset Management Co. Ltd.

Canbank Investment Management Services Ltd.

UTI Asset Management Company Pvt. Ltd.

Institutions:

GIC Asset Management Co. Ltd.

Jeevan Bima Sahayog Asset Management Co. Ltd.

Private Sector:

Indian:-

BenchMark Asset Management Co. Pvt. Ltd.

Cholamandalam Asset Management Co. Ltd.

Credit Capital Asset Management Co. Ltd.

Escorts Asset Management Ltd.

JM Financial Mutual Fund

Kotak Mahindra Asset Management Co. Ltd.

Reliance Capital Asset Management Ltd.

Sahara Asset Management Co. Pvt. Ltd

Sundaram Asset Management Company Ltd.

Tata Asset Management Private Ltd.

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Predominantly India Joint Ventures:-

Birla Sun Life Asset Management Co. Ltd.

DSP Merrill Lynch Fund Managers Limited

HDFC Asset Management Company Ltd.

Predominantly Foreign Joint Ventures:-

ABN AMRO Asset Management (I) Ltd.

Alliance Capital Asset Management (India) Pvt. Ltd.

Deutsche Asset Management (India) Pvt. Ltd.

Fidelity Fund Management Private Limited

Franklin Templeton Asset Mgmt. (India) Pvt. Ltd.

HSBC Asset Management (India) Private Ltd.

ING Investment Management (India) Pvt. Ltd.

Morgan Stanley Investment Management Pvt. Ltd.

Principal Asset Management Co. Pvt. Ltd.

Prudential ICICI Asset Management Co. Ltd.

Standard Chartered Asset Mgmt Co. Pvt. Ltd.

1.1.14 Performance of Mutual Funds in India:

Let us start the discussion of the performance of mutual funds in India from the day the

concept of mutual fund took birth in India. The year was 1963. Unit Trust of India invited

investors or rather to those who believed in savings, to park their money in UTI Mutual

Fund. For 30 years it goaled without a single second player. Though the 1988 year saw

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some new mutual fund companies, but UTI remained in a monopoly position.

The performance of mutual funds in India in the initial phase was not even closer to

satisfactory level. People rarely understood, and of course investing was out of question.

But yes, some 24 million shareholders was accustomed with guaranteed high returns by

the begining of liberalization of the industry in 1992. This good record of UTI became

marketing tool for new entrants. The expectations of investors touched the sky in

profitability factor. However, people were miles away from the praparedness of risks

factor after the liberalization.

The Assets Under Management of UTI was Rs. 67bn. by the end of 1987. Let me

concentrate about the performance of mutual funds in India through figures. From Rs.

67bn. the Assets Under Management rose to Rs. 470 bn. in March 1993 and the figure

had a three times higher performance by April 2004. It rose as high as Rs. 1,540bn.

.The performance of mutual funds in India suffered qualitatively. The 1992 stock market

scandal, the losses by disinvestments and of course the lack of transparent rules in thewhereabout rocked confidence among the investors. Partly owing to a relatively weak

stock market performance, mutual funds have not yet recovered, with funds trading at an

average discount of 1020 percent of their net asset value.

At last to mention, as long as mutual fund companies are performing with lower risks and

higher profitability within a short span of time, more and more people will be inclined to

invest until and unless they are fully educated with the dos and donts of mutual fund.

GROSS FUND MOBILISATION (RS. CRORES)

FROM T U PUB PRIV TOT

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OT

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2


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58,43

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2


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,158

1.1.15 MARKET TREND:

A lone UTI with just one scheme in 1964, now competes with as many as 400 odd

products and 34 players in the market. In spite of the stiff competition and losing market

share, UTI still remains a formidable force to reckon with.

Last six years have been the most turbulent as well as exiting ones for the industry. New

players have come in, while others have decided to close shop by either selling off or

merging with others. Product innovation is now pass with the game shifting to

performance delivery in fund management as well as service. Those directly associated

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with the fund management industry like distributors, registrars and transfer agents, and

even the regulators have become more mature and responsible.

The industry is also having a profound impact on financial markets. While UTI has

always been a dominant player on the bourses as well as the debt markets, the new

generation of private funds which have gained substantial mass are now seen flexing their

muscles. Fund managers, by their selection criteria for stocks have forced corporate

governance on the industry. By rewarding honest and transparent management with

higher valuations, a system of risk-reward has been created where the corporate sector is

more transparent then before.

Funds have shifted their focus to the recession free sectors like pharmaceuticals, FMCG

and technology sector. Funds performances are improving. Funds collection, which

averaged at less than Rs.100bn per annum over five-year period spanning 1993-98

doubled to Rs.210bn in 1998-99. In the current year mobilization till now have exceeded

Rs.300bn. Total collection for the current financial year ending March 2000 is expected

to reach Rs.450bn.

towards mutual funds has become obvious. The coming few years will show that the

traditional saving avenues are losing out in the current scenario. Many investors are

realizing that investments in savings accounts are as good as locking up their deposits in

a closet. The fund mobilization trend by mutual funds in the current year indicates that

money is going to mutual funds in a big way. The collection in the first half of the

financial year 1999-2000 matches the whole of 1998-99.

India is at the first stage of a revolution that has already peaked in the U.S. The U.S.boasts of an Asset base that is much higher than its bank deposits. In India, mutual fund

assets are not even 10% of the bank deposits, but this trend is beginning to change.

Recent figures indicate that in the first quarter of the current fiscal year mutual fund

assets went up by 115% whereas bank deposits rose by only 17%. (Source: Thinktank,

The Financial Express September, 99) This is forcing a large number of banks to adopt

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the concept of narrow banking wherein the deposits are kept in Gilts and some other

assets which improves liquidity and reduces risk. The basic fact lies that banks cannot be

ignored and they will not close down completely. Their role as intermediaries cannot be

ignored. It is just that Mutual Funds are going to change the way banks do business in the

future.

PARTICULAR BANKS MUTUAL FUND

RETURN LOW BETTER

RISK HIGH LOW

INVESTMENTOPTION LESS MORE

NETWORK HIGHPENETRATION LOWBUTIMPROVING

LIQUIDITY ATACOST BETTERQUALITYOFASSETS NOTTRANSPARENT TRANSPARENT

INTERESTCALCULATION MINIMUM BALANCE BETWEEN

10TH AND 30TH OF EVERY

MONTH.

EVERYDAY

ADMINISTRATIONEXPENSES HIGH LOW

GUARANTEE MAX. RS 1LACKONDEPOSIT NONE

Table 1.1

1.1.16 FUTURE OF MUTUAL FUND:

Indian mutual fund industry reached Rs 1,50,537 crore by March 2004. It is estimated

that by 2010 March-end, the total assets of all scheduled commercial banks should be Rs

40,90,000 crore. The annual composite rate of growth is expected 13.4% during the rest

of the decade. In the last 5 years there is an annual growth rate of 9%. According to the

current growth rate, by year 2010,

Mutual fund India assets will be double.

100% growth in the last 6 years.

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Number of foreign AMC's are in the queue to enter the Indian markets like

Fidelity Investments, US based, with over US$1trillion assets under management

worldwide

Our saving rate is over 23%, highest in the world. Only channelizing these

savings in mutual funds sector is required.

We have approximately 29 mutual funds, which is much less than US having

more than 800. There is a big scope for expansion.

'B' and 'C' class cities are growing rapidly. Today most of the mutual funds are

concentrating on the 'A' class cities. Soon they will find scope in the growing

cities. Mutual fund can penetrate rurals like the Indian insurance industry with simple

and limited products.

SEBI allowing the MF's to launch commodity mutual funds.

Emphasis on better corporate governance.

Trying to curb the late trading practices

The asset base will continue to grow at an annual rate of about 30 to 35 % over the next

few years as investors shift their assets from banks and other traditional avenues. Some

of the older public and private sector players will either close shop or be taken over.

1.2) ABOUT SPECIFIC AREA OF THE TOPIC CHOOSEN:

1.2.1 Investment management :

Is the professional management of various securities (shares, bonds etc) assets (e.g. real

estate), to meet specified investment goals for the benefit of the investors. Investors may be institutions (insurance companies, pension funds, corporations etc.) or private

investors (both directly via investment contracts and more commonly via collective

investment schemes e.g. mutual funds) .

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The term asset management is often used to refer to the investment management of

collective investments, whilst the more generic fund management may refer to all forms

of institutional investment as well as investment management for private investors.

Investment managers who specialize in advisory or discretionary management on behalf

of (normally wealthy) private investors may often refer to their services as wealth

management or portfolio management often within the context of so-called "private

banking".

The provision of 'investment management services' includes elements of financial

analysis, asset selection, stock selection, plan implementation and ongoing monitoring of

investments. Investment management is a large and important global industry in its own

right responsible for caretaking of trillions of dollars, euro, pounds and yen. Coming

under the remit of financial services many of the world's largest companies are at least in

part investment managers and employ millions of staff and create billions in revenue.

1.2.2 Investment managers and portfolio structures:

At the heart of the investment management industry are the managers who invest and

divest client investments.

A certified company investment advisor should conduct an assessment of each client's

individual needs and risk profile. The advisor then recommends appropriate investments.

ASSET ALLOCATION:

The different asset classes and the exercise of allocating funds among these assets (and

among individual securities within each asset class) is what investment managementfirms are paid for. Asset classes exhibit different market dynamics, and different

interaction effects; thus, the allocation of monies among asset classes will have a

significant effect on the performance of the fund. Some research suggests that allocation

among asset classes has more predictive power than the choice of individual holdings in

determining portfolio return. Arguably, the skill of a successful investment manager

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resides in constructing the asset allocation, and separately the individual holdings, so as

to outperform certain benchmarks (e.g., the peer group of competing funds, bond and

stock indices).

LONG TERM RETURN:

It is important to look at the evidence on the long-term returns to different assets,

and to holding period returns (the returns that accrue on average over different lengths of

investment). For example, over very long holding periods (eg. 10+ years) in most

countries, equities have generated higher returns than bonds, and bonds have generated

higher returns than cash. According to financial theory, this is because equities are riskier

(more volatile) than bonds which are themselves more risky than cash.

DIVERSIFICATION:

Against the background of the asset allocation, fund managers consider the degree of

diversification that makes sense for a given client (given its risk preferences) and

construct a list of planned holdings accordingly. The list will indicate what percentage of

the fund should be invested in each particular stock or bond. The theory of portfolio

diversification was originated by Markowitz and effective diversification requires

management of the correlation between the asset returns and the liability returns, issues

internal to the portfolio (individual holdings volatility), and cross-correlations between

the returns.

1.2.3 Performance measurement:

Fund performance is the acid test of fund management, and in the institutionalcontext accurate measurement is a necessity. For that purpose, institutions measure the

performance of each fund (and usually for internal purposes components of each fund)

under their management, and performance is also measured by external firms that

specialize in performance measurement. The leading performance measurement firms

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(e.g. Frank Russell in the USA) compile aggregate industry data, e.g., showing how funds

in general performed against given indices and peer groups over various time periods.

In a typical case (let us say an equity fund), then the calculation would be made (as far as

the client is concerned) every quarter and would show a percentage change compared

with the prior quarter (e.g., +4.3% total return in US dollars)..

Generally speaking, it is probably appropriate for an investment firm to persuade its

clients to assess performance over longer periods (e.g., 3 to 5 years) to smooth out very

short term fluctuations in performance and the influence of the business cycle.

An enduring problem is whether to measure before-tax or after-tax performance. After-

tax measurement represents the benefit to the investor, but investors' tax positions may

vary.

RISK ADJUSTED PERFORMANCE:

Performance measurement should not be reduced to the evaluation of fund returns alone,

but must also integrate other fund elements that would be of interest to investors, such as

the measure of risk taken. Several other aspects are also part of performance

measurement: The need to answer all these questions has led to the development of more

sophisticated performance measures, many of which originate in modern portfolio theory.

Modern portfolio theory established the quantitative link that exists between portfolio

risk and return. The Capital Asset Pricing Model (CAPM) developed by Sharpe (1964)

highlighted the notion of rewarding risk and produced the first performance indicators, be

they risk-adjusted ratios (Sharpe ratio, information ratio) or differential returns compared

to benchmarks (alphas). The Sharpe ratio is the simplest and best known performance

measure. It measures the return of a portfolio in excess of the risk-free rate, compared to

the total risk of the portfolio. This measure is said to be absolute, as it does not refer to

any benchmark, avoiding drawbacks related to a poor choice of benchmark.

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.Portfolio normal return may be evaluated using factor models. The first model, proposed

by Jensen (1968), relies on the CAPM and explains portfolio normal returns with the

market index as the only factor. It quickly becomes clear, however, that one factor is not

enough to explain the returns and that other factors have to be considered.

1.3) ABOUT THE TOPIC:

1.3.1 MEANING:

A mutual fund is a professionally-managed firm of collective investments that pools

money from many investors and invests it in stocks, bonds, short-term money market

instruments, and/or other securities. In a mutual fund, the fund manager, who is also

known as the portfolio manager, trades the fund's underlying securities, realizing capital

gains or losses, and collects the dividend orinterestincome. The investment proceeds are

then passed along to the individual investors. The value of a share of the mutual fund,

known as the net asset valueper share (NAV), is calculated daily based on the total value

of the fund divided by the number of shares currently issued and outstanding

1.3.2 DEFINITION:

The SEBI regulations, 1993 defines a mutual fund as a fund in the form of a trust by a

sponsor, to raise money by the trustees trough the sale of units to the public, under one or

more schemes, for investing in securities in accordance with these regulations

1.3.3 CONCEPT OF MUTUAL FUND:

2
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A Mutual Fund is a trust that pools the savings of a number of investors who share a

common financial goal. The money thus collected is then invested in capital market

instruments such as shares, debentures and other securities. The income earned through

these investments and the capital appreciation realised are shared by its unit holders in

proportion to the number of units owned by them. Thus a Mutual Fund is the most

suitable investment for the common man as it offers an opportunity to invest in a

diversified, professionally managed basket of securities at a relatively low cost. The flow

chart below describes broadly the working of a mutual fund.

Mutual Fund Operation Flow Chart:

Figure1.1

1.3.4 ENTITIES IN MUTUAL FUND OPERATIONS:

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In India, the following are involved in a mutual fund operations: the sponsor, the mutual

fund, the trustees, the asset management company, the custodian, and the registrars and

transfer agents.

Sponsor:

The sponsor of a mutual fund is like the promoter of a company. The sponsor may be a

bank, a financial institution, or a financial service company. It may be indian or foreign.

The sponsor is responsible for setting up and establishing the mutual fund. The sponsor is

the settler of the mutual fund trust. The sponsor delegates the trustee fuction to the

trustees.

Mutual fund :

The mutual funds constitued as a trust under the Indian trust act, 1881, and registered

with SEBI.

Trustees:

A trust is a notional entity that cannot contract in its own name. so, the trust enters into

contracts in the name of the trustees. Appointment by the sponsor, the trustees can be

either individuals or a corporate body. Typically it is the latter. The trusees appoint the

asset management company(AMC), secure necessary approval, periodically monitor how

the AMC fuctions, and hold the properties of the various schemes in trust for the benefits

of investors.

Asset Management Company:

It also reffered to as the investment manager, is a separate company appointed by the

trustees to run the mutual fund. The AMC should have a certificate from sebi to act as

portfolio manager under SEBI rules and regulations, 1993.

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Custodian:

The custodian handles the investment back office operations of a mutual fund. It looks

after the receipt and delivery of securities, collection of income, distribution of dividends,

andsegregation of assets between schemes. The sponsor of a mutual fund cannot act as its

custodian.

Registrars and transfer agents:

The registrars and transfer agents handle investor related services such as issuing units,

redeeming units, sending fact sheets and annual reports, and so on. Some funds handle

such fuctions in house, while others outsource it tobSEBI approved registrars and transfer

agents like karvy and CAMS.The legal structure and organization of mutual funds as laid

down by SEBI guidelines is as follows.

ORGANISATION OF MUTUAL FUND:

2

SPONCER OF MUTUAL FUND-

(COMPANY ,BANK)

BORD OF

TRUSEE

POLICY MAKING BODY FOR FUND

RAISING.

ACTUAL IMPLIMENTATION OF THE POLICY

AND INVESTMENT OPERATIONS.

ASSET MANAGEMENT

COMPANY


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Figure 1.2

1.3.5 Schemes of Mutual funds :

Types of mutual fund scheme:

Operational classification portfolio classification

Open ended Return based:

close ended (income,growth, &income and growth fund)

Investment based

(equity, liquid, balanced funds)

2

CUSTODIAN

INVESTOR

ACTING AS REGISTRAR, TRANSFER AGENT AND

RELATED SERVICE FOR MUTUAL FUND.


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Sector based

(real estate, special, index-linked funds)

Leverage based

Others

Figure 1.3 (hedge and offshore funds)

1.3.5 Schemes according to Maturity Period OR by structure:

A mutual fund scheme can be classified into open-ended scheme or close-ended

scheme depending on its maturity period.

Open-ended Scheme: An open-ended fund or scheme is one that is available for

subscription and repurchase on a continuous basis. These schemes do not have a fixed

maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV)

related prices which are declared on a daily basis. The key feature of open-end schemes is

liquidity.

Close-ended Scheme: A close-ended fund or scheme has a stipulated maturity period

e.g. 5-7 years. The fund is open for subscription only during a specified period at the time

of launch of the scheme. Investors can invest in the scheme at the time of the initial

public issue and thereafter they can buy or sell the units of the scheme on the stock

exchanges where the units are listed. In order to provide an exit route to the investors,

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some close-ended funds give an option of selling back the units to the mutual fund

through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at

least one of the two exit routes is provided to the investor i.e. either repurchase facility or

through listing on stock exchanges. These mutual funds schemes disclose NAV generally

on weekly basis.

1.3.6 Schemes according to Investment Objective:

A scheme can also be classified as growth scheme, income scheme, or balanced scheme

considering its investment objective. Such schemes may be open-ended or close-ended

schemes as described earlier. Such schemes may be classified mainly as follows:

Growth / Equity Oriented Scheme:

The aim of growth funds is to provide capital appreciation over the medium to long-

term. Such schemes normally invest a major part of their corpus in equities. Such funds

have comparatively high risks. These schemes provide different options to the investors

like dividend option, capital appreciation, etc. and the investors may choose an option

depending on their preferences.

Income / Debt Oriented Scheme:

The aim of income funds is to provide regular and steady income to investors. Such

schemes generally invest in fixed income securities such as bonds, corporate debentures,

Government securities and money market instruments. Such funds are less risky

compared to equity schemes. These funds are not affected because of fluctuations in

equity markets.

Balanced Scheme:

The aim of balanced funds is to provide both growth and regular income as such schemes

invest both in equities and fixed income securities in the proportion indicated in their

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offer documents. These are appropriate for investors looking for moderate growth. They

generally invest 40-60% in equity and debt instruments. These funds are also affected

because of fluctuations in share prices in the stock markets. However, NAVs of such

funds are likely to be less volatile compared to pure equity funds.

Money Market or Liquid Fund:

These funds are also income funds and their aim is to provide easy liquidity, preservation

of capital and moderate income. These schemes invest exclusively in safer short-term

instruments such as treasury bills, certificates of deposit, commercial paper and inter-

bank call money, government securities, etc. Returns on these schemes fluctuate much

less compared to other funds. These funds are appropriate for corporate and individual

investors as a means to park their surplus funds for short periods.

Gilt Fund:

These funds invest exclusively in government securities. Government securities have no

default risk. NAVs of these schemes also fluctuate due to change in interest rates andother economic factors as is the case with income or debt oriented schemes.

Index Funds:

Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index,

S&P NSE 50 index (Nifty), etc, these schemes invest in the securities in the same

weightage comprising of an index. NAVs of such schemes would rise or fall in

accordance with the rise or fall in the index, though not exactly by the same percentage

due to some factors known as "tracking error" in technical terms. Necessary disclosures

in this regard are made in the offer document of the mutual fund scheme.

Load Funds

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A Load Fund is one that charges a commission for entry or exit. That is, each time you

buy or sell units in the fund, a commission will be payable. Typically entry and exit loads

range from 1% to 2%. It could be worth paying the load, if the fund has a good

performance history.

No-Load Funds

A No-Load Fund is one that does not charge a commission for entry or exit. That is, no

commission is payable on purchase or sale of units in the fund. The advantage of a no

load fund is that the entire corpus is put to work.

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1.3.7 Sector Specific Schemes:

These are the funds/schemes which invest in the securities of only those sectors or industries

as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer

Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the

performance of the respective sectors/industries.

Special Schemes

Industry Specific Schemes

Industry Specific Schemes invest only in the industries specified in the offer document. The

investment of these funds is limited to specific industries like InfoTech, FMCG,

Pharmaceuticals etc.

Index Schemes

Index Funds attempt to replicate the performance of a particular index such as the BSE

Sensex or the NSE 50

Sectoral Schemes

Sectoral Funds are those, which invest exclusively in a specified industry or a group of

industries or various segments such as 'A' Group shares or initial public offerings

Tax Saving Schemes:

These schemes offer tax rebates to the investors under specific provisions of the Income Tax

Act, 1961 as the Government offers tax incentives for investment in specified avenues. e.g.

Equity Linked Savings Schemes (ELSS). Pension schemes launched by the mutual funds also

offer tax benefits. These schemes are growth oriented and invest pre-dominantly in equities.

Their growth opportunities and risks associated are like any equity-oriented scheme.

1.3.8 IMPORTANCE OR BENEFITS OF MUTUAL FUND:

The mutual fund industry has grown at a phenomenal rate in the recent past. The following

are some of the important advantages of mutual funds.

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Channelizing savings for investment:

A number of schemes are being offered by MFs so as to meet the varied requirements

of the peoples and savings are directed towards capital investments directly. In the

absence of MFs these savings would have remained idle.

Offering wide portfolio investment:

Now the investors can enjoy the wide portfolio investment held by the mutual fund.

The fund diversifies its risks by investing in large varieties of shares and bonds which

cannot be done by small and medium investor. This is investors.This is in accordance

with the maximum not to lay all eggs in one basket

Providing better yields:

Due to the large funds. Mutual funds are able buy cheaper and sell dearer than the

small and medium investors. Thus they are able to the command better market rates

and lower rates of brokerage. So they provide better yield to their customers .they also

enjoy the economics of large scale and can reduce the cost of capital market

participation

Redering expertise investment service at low cost:

The management of the fund is generally assigned to professionals who are well

trained and have adequate experience in the field of investment. Thus, investor are

assured of quality services in there best interest. The intermediation fee is the lowest

being 1% in the case of a mutual fund.

Providing research services:

Each fund maintains large research team, which constantly analyses the companies

and the industries and recommends the fund to buy or sell a particular share. Thus

investment are made purely on the basis of a thorough research.

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Offering tax benefits:

Certain funds offer tax benefits to its customers. Thus, apart from dividend, interest

and capital appreciation, investors also stand to get the benefit of tax concession.

Under the wealth tax act, investments in MFs are exempted up to Rs. 5 lakhs.

Introducing flexible investment schedule:

Some mutual funds are permitted the investor exchange their units from one schemes

to another and this flexibility is a great boon to investors.

Providing greater affordability and liquidity:

Even a very small investor can afford to invest in mutual funds. They provide an

attractive and cost effective alternative to direct purchase of shares. Again there is

greater liquidity. Units can be sold to the fund at any time at the net asset value and

thus quick access to liquid cash is assured. Besides, branches of the sponsoring bank

are always ready to provide loan facility against the unit certificates.

Simplified record keeping:

The investor has to keep a record of only one deal with the mutual fund. Even if he

does not keep a record, the MF sends statements very often to the investors.

Supporting capital market:

The savings of the people are directed towards investments in capital market through

these mutual funds. Mutual funds also provide a valuable liquidity to the capitalmarket, and thus the market is made very active and stable.

Promoting industrial development:

All industrial units have to raise their funds by resorting to the capital market by the

issue of shares and debentures. The mutual funds not only create a demand for these

capital market instruments but also supply a large source of funds to the market.

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Diversification: The best mutual funds design their portfolios so individual

investments will react differently to the same economic conditions. For example,

economic conditions like a rise in interest rates may cause certain securities in a

diversified portfolio to decrease in value. Other securities in the portfolio will respond

to the same economic conditions by increasing in value. When a portfolio is balanced

in this way, the value of the overall portfolio should gradually increase over time,

even if some securities lose value.

1.3.8 Drawbacks of Mutual Funds:

Mutual funds have their drawbacks and may not be for everyone:

No Guarantees: No investment is risk free. If the entire stock market declines in

value, the value of mutual fund shares will go down as well, no matter how balanced

the portfolio. Investors encounter fewer risks when they invest in mutual funds than

when they buy and sell stocks on their own. However, anyone who invests through a

mutual fund runs the risk of losing money.

Fees and commissions: All funds charge administrative fees to cover their day-to-

day expenses. Some funds also charge sales commissions or "loads" to compensate

brokers, financial consultants, or financial planners. Even if you don't use a broker or

other financial adviser, you will pay a sales commission if you buy shares in a Load

Fund.

Taxes: During a typical year, most actively managed mutual funds sell anywhere

from 20 to 70 percent of the securities in their portfolios. If your fund makes a profiton its sales, you will pay taxes on the income you receive, even if you reinvest the

money you made.

Management risk: When you invest in a mutual fund, you depend on the fund's

manager to make the right decisions regarding the fund's portfolio. If the manager

does not perform as well as you had hoped, you might not make as much money on

your investment as you expected. Of course, if you invest in Index Funds, you forego

management risk, because these funds do not employ managers.

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1.3.9 OPTIONS AND VALUE-ADDED SERVICES:

Thanks to the heightened competition in the mutual fund industry, mutual funds now offer

various options and value-added services to attract and retain customers.

Options:

With respect to a number of schemes, mutual funds offer the following: dividend and growth

options, systematic investment plan, and systematic withdrawal plan.

i. Dividend and growth options When you join a scheme, you can shoose the dividend

option or the growth option. Under the dividend option, the gains of the scheme are paid

out at regular intervals in the form of dividends. Funds may offer daily, weekly,

monthly, quarterly, half-yearly, and annual dividend options.

ii. Under the growth option, investment gains are ploughed back into the scheme and no

dividends are declared. Though the returns from both the dividend and growth options

will be the same, the tax implications may be different.

iii. Systematic investment plan Under the systematic investment plan (SIP), the investor can

invest regular sums of money every month to buy units of a mutual fund scheme. As theinvestment is made regularly, the investor buys more units when the price is low and

fewer units when the price is high.

iv. Systematic withdrawal plan A systematic withdrawal plan (SWP) works like a

systematic investment plan in the opposite direction. The SWP allows the investor to

withdraw a fixed amount every month.

8.2 Value-added services :

Mutual funds offer value-added services like redemption over phone, triggers and alerts,

cheque book facility, and new points of purchase.

i. Redemption over phone Prudential ICICI for example offers investors the facility of

making a redemption request or switch between schemes over the phone.

ii. Cheque book facility Fund houses take few days to process a redemption request and

then further time is lost when the redemption cheque is in transit. To cut down this

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delay, some fund houses give investors in certain schemes (typically debt scemes), the

some limit, at the time of investment itself. Encashment of the cheque is deemed as

withdrawal, at the schemes NAV on the day the cheque is deposited.

1.3.9HOW TO PICK UP CHOOSEN ONE:

There are few tips which helps the investors to choose right fund.

The fund offering:

Investors having wide range of offering to choose from different fund each fund is

a distinct offering, pick the one that suits your risk appetite and profile the best.

The funds performance:

The return clocked by a fund are an important parameter to judge its worth as an

investment avenue, while the funds return are historical in nature. It serves as an

indicator of what the fund is capable of performing.

The fund manager/management style:

The fund manager and his approach to fund management play a vital role in

determining the funds success or otherwise. Evaluate the fund managers past track

record in the schemes he manages.

Portfolio management:

The funds portfolio can reveal a lot about the fund. Ideally a fund should display a high

degree of consistency in its holdings; similarly the portfolio should be a well-spread one.

Risk-adjusted return and volatility:

We havw discussed about importance of a funds performance i.e. the return it has

delivered; however, the fund showing on the risk-adjusted return front is vital as well. A

higher sharp ratio is indicative of the fact that the fund has adequately compensated itsinvestors for risk borne.

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Expense ratio and load:

Expenses incuured by the fund have a significant impact on its performance. The

expenses are incurred for a variety of reasons ranging from management fees to

marketing and selling expenses. Similarly entry/exit load are vital too. An entry load

reduces the amount invested proportionately and only the balance is utilized for

generating returns.

The fund house:

The fund house is an important entity and due attention must be to it as well. Investors

comfort levels would surely be higher if the fund house is a reputed one has a history

of producing funds that have superior returns.

Seek advice:

Utilize the services of a financial planner before making investments in mutual funds.

A financial planner will help you create a portfolio comprising of schemes that are

right for you.

The PMS option:

Investors who have a large investible surplus can explore the option of utilizing a

portfolio performance management services (PMS) can be explored. The right

investment plan an important role in enabling you to achieve you financial goals andobjectives.

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CHAPTER TWO:

RESEARCH DESIGN:

2.1. Introduction:

Research refers to a search for knowledge. The advanced learners dictionary of current

english lays down the meaning of research as a careful investigation or enquiry specially

through search for new facts in any branch of knowledge.

Research methodology is a way to systematically solve the research problem. It may be

understood as a science of studying how research is done scientifically. In it we study the

various steps that are generally adopted by a research in studying his research problem along

with the logic behind them. It is necessary for the researcher to know how to develop certain

indices or tests, how to calculate the mean, the mode, the median or the standard deviation or

chi-suare, how to apply particular research technique, but they also need to know which of

these methods or techniques, are relevant and which are not, and what would they mean and

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indicate and why. Researchers also by which they can decide that certain techniques and

procedures will be applicable to certain problems and other will not. All this means that it is

necessary for the researcher to design his methodology.

The research methodology has wider dimension and wider scope than that of research

methods. Thus, when we talk of research methodology we not only talk of research methods

but also consider the logic behind the methods we use in the context of our research methods

but also consider the logic behind the methods we use in the context of our research study

and explain why we are using a particular method or technique and why we are not using

other so that research results are capable of being evaluated either by the researcher himself

or by others.

2.2 Review of literature:

A research should be preliminary orientation and background knowledge about the topic and

he should collect the basic concept and information regarding the final in which the topic

includes due to this reasons review of the literature has an important role in research study.

Considering the importance of mutual funds, several academicians have tried to study the

performance of various funds. Initially, their studies have focused on timing and investment

abilities of fund managers. Later, several researchers have tried to study the various factors

and their impact on fund performance. These factors include potential measurement errors

from survivorship bias and misspecification of the benchmark, the impact of fund expenses

and economies of scale, to the personal characteristics of fund managers. Various studies that

focused on factors such as the ability of fund managers to consistently outperform the market

and the fund specific organizational and managerial aspects, came out with contradictory

conclusions.

Jensons (1968) study on mutual fund performance of 115 funds over a period spanning from

1945 60 1964, confirmed the efficient market hypothesis. His analysis has shown that the

performance of expense-adjusted fund returns was markedly lower than those randomly

chosen portfolios of a similar risk category. These results were in sync with the findings of

Treynor 91965) and Sharpe (1966). Performance of professionally managed funds also was

not any better than the performance of risk-adjusted index portfolio, which also indicated that

managers of these funds did not appear to possess private information. Thus, the results of

the early studies prevailed as general conclusions in the erstwhile literature.

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However, a number of later studies on the topic, nonetheless, go against the early findings.

For instance, a study by Ippolity (1993) found mutual fund returns after expenses (before

loads) to be superior than the returns offered by risk-adjusted market indices, which indicated

that mutual fund managers may have access to the useful private information. Thus, the

mutual fund managers may produce such excess returns that can offset the expenses of the

fund.

Further studies by Grinblatt and Titman (1992), Hendricks, Patel and Zeckhauser (1993),

Goetzmann and Ibbotson (1994), and Volkman and Wohar (1995) were in support of market

efficiency as they discovered instances of repeated winners amongst fund managers.

Recently, Wermers (2000) decomposed mutual fund returns into a stock picking talent;

features of stockholding and trading costs and expenses. The decomposition helped him

show that stock picking of funds, in fact, enabled the managers to cover their costs. Other

studies by Elton, Gruber, Das and Hlavka (1993), Malkiel (1995) and Carhart (1997)

reinforce the early conclusion of Jensen (1968). While doing away with survivorship bias,

carhart (1997) has shown that the common factors that drive stock returns are responsible for

consistency in mutual fund performance.

On the other hand the Malkiel (1995) study considers both benchmark errors and

survivorship bias and concludes that the previous results indicating market inefficiency were

affected by these factors.

2.3 Statement of the problem:

A study on Analysis of the performance of mutual fund with reference to mutual fund

industry.

2.4. Scope of the study:

The study of mutual fund has the wider scope. Mutual fund is a professionally managed form

of collective investment that pools money from many investors and invest it in stocks, bonds,

short-term money market instruments and other securities. Mutual fund distributors of tax

free municipal bonds income are also tax free to the share holders. Taxable distribution can

be either ordinary income or capital schems which are equity schemes , debt and hybrid

schems.

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The present study includes five-year return of the mutual fund companies and funds in

India. Out of all mutual fund companies we have selected only two companies those are ING

mutual fund and HDFC mutual fund, and only those schemes and funds are included in this

study, which are performed well during from last few years. The schemes covered under the

study are:

i. ING domestic opportunities fund.

ii. ING selected stock fund.

iii. INg dividend yield fund.

iv. ING nifty plus fund.

v. ING L.I.O.N fund .

vi. ING Tax saving fund.

vii. HDFC Growth fund.

viii. HDFC Equity fund.

ix. HDFC top 200 fund.

x. HDFC Capital builder fund.

xi. HDFC index fund(Sensex plan).

xii. HDFC Index fund(Nifty plan).

To evaluate the performance of schemes and funds, the researcher applied Sharpe Index,

Treynor Index and Jensens Alpha measure.

2.5. Objectives of the problem:

The major objectives of study are as follows.

To evaluate investment performance of mutual funds in terms of risk and return.

To examine the funds sensitivity to the market fluctuations in terms of beta.

To find out the financial performance of mutual fund schemes.

To appraise investment performance of mutual funds with risk adjustment, the

theoretical parameters as suggested by Sharpe, Treynor and Jensen.

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To analyze the performance of various schemes of mutual funds.

To identify the sector where the mutual fund and how invested.

To provide valuable suggestions and recommendations.

2.6. Methodology:

Methodology is a way to systematically solve the research problem. It may be understood as

a science of studying how research is done scientifically. In it we study the various steps that

are generally adopted by a research in studying his research problem along with the logic

behind them. Methodology refers to methods adopted to carry out the research and steps

adopted to solve the problem finding solution

2.6.1 Type of the study:

Descriptive study:

The type of the study or research used in this project is a descriptive research design. It

mainly involves surveys and facts findings enquiries of different kinds. The main objective of

descriptive research is to describe the state of affairs as it exists at present. The major purpose

of descriptive research is a description of the state of the affairs, as it exists at present. Thus a

descriptive study is a fact finding investigation with adequate interpretation. It is the simplest

type of research. It focuses on particular aspects or dimensions of the problem studied. It is

designed that it gathers descriptive information and provides information for formulating

more sophisticated studies. There is a cause effective relationship.

The criteria for selecting this particular design are that, the problem of the project must be

described and not arguable. The data collected is amenable to statistical analysis and has

accuracy and significance. It is possible to develop to valid standards of comparison. It tends

itself to the verifiable procedure of collection and analysis of data.

Descriptive study objective aim at identifying the various characteristics of a company

problem under study. It can reveal potential relationships between variables with exploratory

research.

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2.6.2 Type of data:

Secondary data:

The data which is used for the research is secondary data. The secondary data is the

data which is duplicate of primary data. The data (published or unpublished) which

have already been collected and processed by some agency or person and taken over

from there and used by any other agency for their statistical work are termed as

person and taken over from there and used by any other agency for their statistical

work are termed as secondary data as far as second agency is concerned. The second

agency if and when it publishes and files such data becomes the secondary source to

anyone who later uses these data.

In other words secondary source is the agency who publishes for use by others the

data which was not originally collected and processed by it.

2.6.3 Sources of data:

Unpublished sources:

i. The data can be governments or private offices can be collected from these are

unpublished data.

ii. The research work, the secret documents.

Published sources:

i. Central and state government publication publishes the various statistics like crop

production, population, statistic, wages expenses.

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ii. The commerce association, commerce and trade association, Indian chamber of

commerce federation are publishes several data.

iii. News paper, journals, periodicals etc. publishes the several data.

iv. Some private organization, research berceuse, universities publishes several datas.

Periodicals: ICFAI journals

Internet: google.com

Value research online.com

Nytimes.com

AMFI.com

News papers: financial express

Company journals: Factsheets of ING investment and HDFC.

2.7 Tools for analysis:

2.7.1 Standard deviation:

It is used to measure the variation in individual returns from the average expected return over

a certain period. Standard deviation is used in the concept of risk of a portfolio of

investments; higher standard deviation means a greater fluctuation in expected return.

2.7.2 Beta:

Beta measures the systematic risk and shows how prices of securities respond to the market

forces. It is calculated by relating the return on a security with return for the market. By

convention, market will have beta 1.0 Mutual fund is said to be volatile, more volatile or less

volatile. If beta is greater than 1 the stock is said to be riskier than mark

2791632 Basic Information on Mutul Funds

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